Ofgem consults on network charging reforms

Ofgem is consulting on reforms to the way some electricity network charges are set as Britain’s energy system becomes smarter and more flexible.

More homes, public bodies and businesses are generating electricity on-site, particularly from renewables such as solar power, and taking less electricity from the grid. They still rely on the grid, for example, on dark winter evenings when solar power cannot generate electricity.

The costs of the pylons and cables that make up the grid are recovered through electricity network charges which amount to around £9 billion per year. They are ultimately reflected in energy bills paid by consumers.

There are different types of network charges. Forward-looking charges tell generators and other users of the system how much their usage of the network will increase or decrease costs for network companies in future. Our consultation focuses on residual charges which provide the additional revenue that the companies are allowed to recover for running the networks, under Ofgem’s price controls.

Under the current network charging system, these residual charges are based on how much electricity consumers take from the grid. Users who generate electricity themselves on site can avoid a lot of these charges even though they use the grid as back-up. As a result, consumers that take all their electricity from the grid, including households which have not installed solar panels or other renewables, pay more of these charges.

Ofgem’s proposed charging reforms will ensure these charges for the grid are shared fairly between all consumers. In a consultation, the regulator has set out its preference to introduce fixed residual charges for all households and businesses rather than charges based on the amount of electricity they take from the grid under the current charging system. They would be broadly similar to fixed telephone line rental arrangements.

Under these proposals, many homes and businesses will save money, although some, including those that generate electricity at home or on-site, could pay more. Ofgem is asking for views on whether the changes should be implemented in 2021, or phased in between 2021 and 2023.

In addition, Ofgem is proposing to remove some of the differences in the way that smaller generators connected to the distribution network are charged compared to larger generators. Removing some of these remaining ‘embedded benefits’ will lead to significant savings for consumers, and Ofgem is asking for views on whether these changes should be implemented in 2020 or 2021.

Overall the reforms to residual charges and embedded benefits set out today could lead to total savings to consumers of between £5 billion and £7.6 billion from when they are implemented, up to 2040.

Next month, Ofgem will announce the next steps for putting in place tougher price controls for energy networks from 2021, and freeing up electricity network capacity so it can be used more efficiently. Both these reforms will lower the overall cost of the networks for consumers.